Section III-A - Lesson 7
Your 401k Fidelity Mutual Funds Account
If you are investing your 401k money at work in a 401k Fidelity mutual funds account, you will probably be asked to select one or more investments from a list that looks like this.
Typical 401k Fidelity Mutual Funds Menu
Cash Reserves
(Often provided by a non-Fidelity source.)
Bonds
(Often provided by a non-Fidelity source.)
Asset Allocation
Fidelity Freedom 2000 Fund
Fidelity Freedom 2010 Fund
Fidelity Freedom 2020 Fund
Fidelity Freedom 2030 Fund
Fidelity Freedom 2040 Fund
Fidelity Freedom Income Fund
Domestic Stocks
Fidelity U.S. Equity Index Pool (Or Spartan 500 Index Fund, or Spartan U.S. Equity Index Fund)
Fidelity Equity Income Fund
Fidelity Contrafund
Fidelity Magellan Fund
Fidelity OTC Portfolio
For details about any or all of these Fidelity mutual funds you can go to the Fidelity website, or call Fidelity toll free at 1-800-343-3548.
The Best 401k Fidelity Investments For You
Even though Fidelity provides you with a wide variety of choices, you should know from your reading earlier in this section (see Lesson 4) that while it is often made to sound like the more investments you pick, the better, the opposite is actually true.
The fact of the matter is that splitting your investment among two or more choices will only make you poorer, not safer. There is usually one, and only one, correct selection for you on the entire list of investments, and this will be the most widely diversified domestic common stock fund on the menu.
In the case of the "typical" 401k Fidelity Investments menu shown above, the most widely diversified domestic common stock fund would be The Fidelity U. S. Equity Index Pool, which is constructed to imitate the performance of the S&P 500 Index.
Some Fidelity menus list a Spartan 500 Index Fund or a Spartan U. S. Equity Index Fund instead, which likewise are constructed to imitate the performance of the S&P 500 Index. Either of these is also acceptable. Usually only one of these three funds will be available on your menu.
When you purchase shares of an S&P 500 Index fund you are participating in the growth of the 500 largest and most influential companies in America that jointly represent more than 70% of the value of all U.S. traded common stocks.
You are essentially "buying the general market" and over the years you can expect to get the rate of return of the general market, which since 1926 has been more than 10% annually.
This Index fund provides a simple, easy solution to the challenge of selecting the right investment. With this fund you will always be widely diversified in a broad based cross section of the American economy and you should expect to prosper over the years as our country prospers.
You should "allocate" 100% of your contribution to this investment. Anything you split it with will greatly reduce your long-term overall rate of return and will not gain you any further meaningful diversification. Your money is already "split" amongst the 500 most prestigious corporations in America, so you certainly don't have "all your eggs in one basket".
What about stability, you might ask. Couldn't you expect less fluctuation in the value of your holdings if you balanced your stock fund holdings with a bond fund or money market fund, for example?
Sure you could, if you were willing to give up half, or two-thirds of your potential wealth for the sake of not seeing your investment fluctuate from time to time. I hope you're not willing to do that. If you're the least bit unclear about this, go back and re-read the lessons about understanding risk in the previous section.
Take time to realize, on an emotional level, that your 401k is a long-term investment proposition and that, because you won't be needing most of the money for many years to come, you don't really need to be concerned about the fluctuation, but only about the long-term rate of return.
In a long-term investment program - spanning 30 years or more - time, diversification, and the timing technique of dollar-cost-averaging (making small regular contributions) serve to minimize the risks of owning common stocks to the point of non-existence.
A Publication of About Your 401k.com
The book that inspired the birth of this website. Now available in either PDF or hardcover. Check it out!
_________________
_________________
_________________
